Using CAPM to Evaluate Apple’s Stock: Insights on Expected Returns
Key Takeaways
- CAPM evaluates expected return by considering systematic risk through beta, representing asset volatility against the market.
- Systematic risk is rewarded under CAPM as unsystematic risk is diversifiable with varied portfolios.
- With CAPM, Apple’s expected annual return is estimated at 6.25%, using a 2% risk-free rate and an adjusted beta of 1.18.
- CAPM does not account for unsystematic risk or the cost of diversification, limiting its accuracy in real-world applications.
- Other models like Arbitrage Pricing Theory add factors to better account for risks not captured by CAPM.
Capital Asset Pricing Model (CAPM) estimates the expected return of an asset based solely on the systematic risk of the asset return. The logic behind…
